Dividend Stocks: Qualcomm, TJX - 9608 views

04/16/10 - 04:27 PM EDT

By Jonas Elmerraji
Published on April 16, 2010 at 2:48 p.m. ET

Another tax season is -- hopefully -- behind us, but 2010’s tax time could have some pretty significant implications for dividend investors. That’s because this year is the last year that President Bush’s Tax Reconciliation Act keeps tax cuts on dividends income effective. Although President Obama is vowing to keep most of the cuts in place beyond 2011, it looks like lowered unearned income rates could be coming to an end for high earners.

Whatever your dividend tax rate may be when next year rolls around, it makes sense to focus on the stocks that payout decent dividends. Why all the hubbub about dividends?

Historically, companies that pay higher dividends materially outperform those that don’t -- in the last 36 years, dividend stocks outperformed the rest of the S&P 500 by 2.5% annually. And they outperformed non-payers by nearly 8% each and every year according to a study from NDR. That means that when a company actually increases its dividend, investors would do well to take notice.

Energy utility Entergy Corporation (ETR) has undertaken an extensive plan to return cash to shareholders in 2010. The company has a $750 million share buyback program in place, and last week management announced a 10.7% increase in Entergy’s quarterly dividend payout, bringing the company’s dividend yield to 4.1%.

This company is more than just a utility -- its merchant power plants generate approximately 30,000 megawatts in parts of the Northeast and Middle America, in addition to its regulated utility business in the Gulf States. That mix of regulated, highly recurring utility revenue and more commodity-like merchant energy sales have provided Entergy with significant cash flow to funnel into investors’ pockets in the form of dividends. And although plans to separate its utility and power generation segments have faced trouble amid a lukewarm equity market, expect its payouts to continue to see stable growth in 2010.

Among Entergy’s biggest institutional owners is the MFS Utilities Fund (MMUFX), which owns stakes in PG&E (PCG) and AT&T (T) in addition to the $15 billion power play.

While Qualcomm (QCOM) announced an 11.8% dividend hike last week, the company’s second quarter earnings call on April 21 should be getting most of the analyst attention for now. The wireless technology giant has been languishing in 2010 thanks in large part to poorly received guidance for the year back in January -- but with sights set markedly lower, shares could take off following decent numbers next week.

But let’s get back to dividends. Qualcomm’s increase sets its quarterly payout at 19 cents per share, a 1.78% yield. Despite its seemingly slim appearance, that’s a relatively generous yield for the tech sector -- and with Qualcomm’s blemish-free balance sheet, it’s one that isn’t much at risk. The company’s $18 billion in cash should help satiate anxious investors.

That bank statement is certainly keeping the management team at the Vanguard PRIMECAP Fund (VPMCX) appeased. The nearly $30 billion superfund (closed to new investors) also owns stakes in Southwest Airlines (LUV) and Amgen (AMGN).

With an uptick in consumer spending underway, retailers like TJX Companies (TJX) are benefitting in a big way. The discount apparel and home goods retailer owns store brands like T.J. Maxx, A.J. Wright, and the aptly named HomeGoods, which operate in the United States, Canada, and Europe. The company’s dividend increase last week puts its current yield at 1.3%

With a focus in off-price retail, TJX profited as consumers traded down from pricier apparel and houseware sellers. And economic tailwinds continue for the company — while consumers are clearly more willing to part with their cash this year, it’s clear that they’re doing it more carefully than in the past. Discounters like TJX should still get significant business as long as a dollar goes further in their checkout lines. With an above-average balance sheet, TJX should continue to be a force to be reckoned with.

That sentiment is being shared by the Fidelity Contrafund (FCNTX), which holds Morningstar’s coveted five-star rating. The fund currently holds positions in Visa (V) and Disney (DIS) in addition to its stake in TJX.